Here's my summary of the key events overnight that affect New Zealand, with news a full-blown banking crisis is brewing in Italy.
Firstly however, the final growth data for the giant American economy in the first quarter confirmed it slowed but not as sharply as previously estimated, with gains in exports and software investment partially offsetting weaker consumer spending. The final growth for Q1 is +1.1%, rather than the +0.8% pace reported last month. Their economy grew at a rate of +1.4% in the fourth quarter of 2015.
Consumer confidence in the US took an unexpected turn for the better in June in a survey out overnight. Perhaps strong house price gains helped.
And stocks are sharply higher on Wall Street today, with equity investors piling back in. The S&P500 is up almost +1.5% on the day with the later trades accelerating the trend.
Staying in the US, the final settlement between the various regulatory parties in the US and car maker Volkswagen is tougher than we reported it might be last week. In fact, the car maker may end up paying over NZ$20 bln to resolve its diesel deception. They have agreed to buy back cars if that is what the owners want. And they are being required to spend almost NZ$7 bln to develop "zero-emissions vehicle technology".
A major casualty of the Brexit shock may be the Italian banking system. Italy is preparing a €40 bln (NZ$63 bln) rescue of its financial system as bank shares have collapsed on the Milan stock exchange. An Italian government task force is watching the markets hour by hour, pledging all steps necessary to ensure stability of the banks. This is a big deal, but has its roots in 2008 because those earlier problems were papered over rather than being dealt with at the time. A collapse here is the sort of trigger the Europeans just don't need.
In New York, the benchmark UST 10yr yield has not fallen any further and is still at 1.46% in late trading. Locally, swap rates flattened at their low levels yesterday with the 1-5 curve now at just +7 bps and the 2-10 curve at +42 bps, both post-GFC lows.
Japan’s benchmark bonds are now all yielding less than 0.1% for the first time ever, pushed down by a global surge in sovereign debt prices following Brexit. The rally in Japan pushed yields on the nation’s longest debt, the 40-year bond, to just 0.065%. At the same time New Zealand's, Australia’s and South Korea’s 10-year yields all dropped to unprecedented levels. Our NZGB 2020s and 2021s may in fact soon yield less than 2%.
The US benchmark oil price is up today, now just under US$48/barrel and the Brent benchmark is just over US$48/barrel.
The gold price is down US$6 to US$1,314/oz. In a small spurt of futures trading yesterday, prices for WMP softened. We will get a better idea of this market with the next GlobalDairyTrade auction.
And finally, the NZ dollar starts a little firmer, now at 70.2 US¢, at 95.4 AU¢, and at 63.6 euro cents. The TWI-5 index is at 74.2. Incidentally, the Chinese have pushed their currency lower against the US dollar again in their overnight fixing.
If you want to catch up with all the local changes yesterday, we have an update here.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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Italy is the third largest economy of the Euro-zone after Germany and France, unfortunately, it holds the largest public debt totaling over 2 trillion euros. While Italy talks about its commitment to fiscal reform it continues to run a budget deficit of 3%. With government debt standing at $2.4 trillion dollars around 140% of GDP other problems are sighted. We see a government slow to pay its suppliers and weak in its ability to collect taxes, each year there is an estimated $160 billion in taxes uncollected.
http://brucewilds.blogspot.co.uk/2016/06/italys-future-hampered-by-debt…
Australia is a basket case according to those who put money where their mouth is.
Despite Australian equities typically climbing after elections, Smallco Broadcap Fund is putting a quarter of its assets in cash. Managers at the fund, which has beaten more than 450 stock funds with an annual 22 percent return over the past five years, say valuations are too high and either political party will struggle to boost economic and earnings growth, especially after the Brexit vote sparked global market turmoil. Read more
Peter Brandt.
Recent events only highlight the importance of Risk Management. Late Thursday evening, and early Friday morning, I spoke by phone to many of the old-timers (some with near 50-year trading careers) in whom I have the highest level of respect. There was a universal consensus – we have never witnessed markets like those experienced over such a brief period of time. Even though I had almost no exposure, I stayed up into the late hours on Thursday evening watching in awe a broad level of volatility exceeding anything I can remember. There was, no doubt, some serious blood-letting. In the weeks ahead we will read and hear about some horror stories. More than one trading firm will announce bankruptcy. We will not hear about the hundreds of individual speculators whose accounts were destroyed.
Im staggered that the mainstream news media here have not reported on the Italian banking system collapse.
It reinforces how inept our news outlets have vecome, or perhaps more accurately how disinterested joe public is on financial matters.
Unless it is rising house prices. Then everyone is an expert!
its a liquidity crisis, Italian banks might be a mess but then Portugal and Spain are right behind and Greece is still hanging in there, anyway who are we to be throwing stones in glasshouses.
http://www.rbnz.govt.nz/statistics/s7
The UK had already signed agreements not to contribute to euro-zone bail-outs except through their IMF funding. Just another bit of dis-information put out by the leave campaign.
Thanks Andrewj.
Phew that "Household-housing" number stands out like the veritable DBs. Does anyone know if that even includes Companies that invest in residential housing or is it just owner/occupiers and 'Mum and Dad' investors?
So a 1% move upward in average interest rates adds an additional $2.27 Billion to total the household interest bill. Are the risk management department on extended leave? What crisis JK?
yes Tom, looks like the world will get stuck in a low interest rate trap. As can't put rates up. People, governments, companies all borrowed so much at low rates, rising rates will tip many into bankruptcy. Crazy, crazy environment, where borrowers rewarded and savers are punished....very bad for long term growth
The mainstream media probably view this as feeding public contagion and panic. I think that there is a very large amount of self censorship from the management of the various mainstream media outlets, particularly in NZ and this will get worse as they amalgamate to survive. It is reaching the point where reading newspapers or watching the news is a waste of time. Apart from a handful of outlets, a menu of free and nimble net based media will give you a better idea of what is really going on. In no small way, this site amongst them. Thank you. Interesting to ponder what all the spin doctors are going to do as TV fades away in favour of Netflix etc. How will the establishment brainwash the masses? Write puff pieces for the net based outlets I suppose. They are probably doing it already.
They may not wish to draw a comparison with the stated aims of the Italian government which are far more appealing than the savings haircut proposal embedded in the RBNZ's OBR Australian bank underwriting scheme.
European institutions are ready to step in to protect people's bank savings "if necessary, for the moment not... So don't worry for that", he said. Read more
Meanwhile, the shameless Aussie banks offer offensive interest rate pittances to New Zealand unsecured savers because they can.
The news from China this morning was unexpected only to those who still cling to the idea that the PBOC control is omnipresent. Exports were down 6.6% Y/Y in March (after dropping 18.1% Y/Y in February), while imports simply collapsed 11.3% Y/Y. Since China has been operating as the global trade pivot, the results on both sides of the trade balance for China show unkempt systemic strain.
The ongoing disaster in trade demonstrates the miscarriage of that strategy (on both ends), namely not anticipating orthodox failure across every jurisdiction to deliver promised resurrection. There has been no American surge to reignite the export “miracle”, while Europe tries to convince itself and the world that not shrinking counts as a recovery. Now the Chinese are in a nearly impossible and precarious position.
http://www.alhambrapartners.com/2014/04/10/dollar-and-trade-delinked-gl…
Thanks for the link David: “By duping the regulators, Volkswagen turned nearly half a million American drivers into unwitting accomplices in an unprecedented assault on our environment,” said Deputy Attorney General Sally Q. Yates'
Of course it is not just the matter of Volkswagen diesel vehicles but the entire motor vehicle industry, plus several other sectors of the global economy which are accomplices, if not prime drivers, in 'an unprecedented assault on our environment.'
This year atmospheric CO2 levels have been in the range 2 ppm to 6 ppm above the same day a year ago, e.g. Daily CO2 : June 27, 2016: 405.29 ppm; June 27, 2015: 401.26 ppm ; up 4.03 ppm. This compares very unfavourably, to put it mildly with the most recent published decade average of 2.11 ppm annual rise (actually an extreme emergency), and is a clear indication the matter of emissions is not being dealt with at all: just a lot of lip service.
The effects of excess of CO2 in the atmosphere are already very apparent, with a string of record temperatures having been recorded and Arctic ice cover at the lowest ever, and on track for a new record low later this year.
https://ads.nipr.ac.jp/vishop/vishop-extent.html
Whilst American consumer confidence may be up, such metrics are fairly meaningless in the face of America's rapidly worsening environmental status, as exemplified by the lowest-ever level for Lake Mead, which arguably one of America's most important lakes, if not the most important, for water supply and power generation (Hoover Dam).:
http://mead.uslakes.info/level.asp
Thus, we are witnessing the global economic system 'progressively' destroying everything it needs for its own survival. However, such realities are lost on politicians, economists and bankers, who are clearly quite comfortable with sacrificing the entire global environment for the sake of few dollars more. But the insurance sector must surely be getting rather anxious, what with so much of California going up in smoke recently and so many other burgeoning consequences of the failure of so-called leaders to deal with anything fundamental.
Here is a link to Donald Trump's latest speech. The TPPA is toast when he becomes President. It is a very entertaining listen, IMO. The speech begins at 4 minutes. This is full strength information, not the pap that has been sieved, pureed and put in baby bottles, for our consumption, by the main stream media.
Full Speech: Donald Trump Delivers Economic Policy Speech in Monessen, PA (6-28-16)
Hi AFKTT
I share your concerns!
Here is the most entertaining reassurance I can offer you. Enjoy
"Scott Adams of Dilbert on Trump's Genius"
As usual, DC, the Italian situation has long been foreshadowed: Spengler has a round-up here: http://atimes.com/2016/03/italys-banks-should-scare-janet-yellen-even-m…
And AEP @ Torygraph adds the piquancy we have come to expect from him: http://www.telegraph.co.uk/business/2016/06/27/italy-eyes-40bn-bank-res…
And for all the common taters who suggest a move to a 'more sustainable system' I have a single question.
'Sustainable' at what level of comfort, compared to today?
Well the EU actually does need the smaller heavily in debt countries such as Greece, Spain and even Italy to keep them afloat and buoyant. Since both France and Germany are mainly export nations (With car industries etc..), so they need the smaller less well off countries to keep the Euro low and therefore keep their exports affordable to the rest of the world.
Hence why Germany and France will keep throwing them bread crumbs in the form of bail out funds.
Who cares about Italian banks - the breadmakers and bread eaters of the UK are now better off. That's what cost the politcal class in the end - not looking out for The Sun readers.
"The 50-year-old told The Sun on Sunday: “I think there are great opportunities. For years British bakers have been forced by EU tariffs to buy European wheat instead of looking to the wider world. Any master baker will tell you that the best baking wheat in the world is Canadian wheat. But we aren’t free to buy it because the EU punishes you if you do. And why should we be giving Spain money to grow sugar? What’s wrong with looking to the West Indies and doing trade there? Now when we leave the EU, hopefully we can shop around.”
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